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August 28, 2015

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Fitch Ratings downgrades debt of Clark County School District

Wall Street is reacting to Nevada's public school budget cuts -- and it's not happy.

Fitch Ratings on Tuesday downgraded $4.1 billion of Clark County School District debt and revised its rating outlook on the debt from stable to negative.

The rationale, in part, was "intense budgetary pressure due to the state's fiscal imbalance and its central role in school funding."

The Clark County School Board last week voted to oppose a plan by Gov. Brian Sandoval to shore up the state budget by diverting $300 million in debt service reserves to other purposes.

According to Fitch, the state budget shortfall is just part of the problem facing the school district.

"The negative outlook reflects Fitch's expectation that the economy in the Las Vegas Valley will be slow to improve and that the district will be challenged to balance operations as significant cuts have already been made and 89 percent of operating expenditures are for salaries and benefits," Fitch said in Tuesday's report on the nation's fifth-largest district serving some 309,000 students.

"The district's financial position remains adequate, but operations are stressed, primarily as a result of lower state funding levels," Fitch said. "For fiscal year 2012, the state has proposed a 5 percent decline in the per pupil funding level.

"Closing an estimated $250 to $275 million shortfall for fiscal 2012 (by the district) will prove yet more difficult as most of the available reserves have been used and all of the non-labor cuts have been made. As the district is forced to increase its student to teacher ratio, it risks losing more students to charters or private schools, exacerbating its revenue decline. With the local and state economic recovery not yet taking hold, the outlook for revenue stability and growth is negative, and the district will be forced to continue to make deep cuts to its operations," Fitch said.

In ratings actions Tuesday, Fitch assigned AA- ratings to some $130 million in bonds the district intends to sell next month. This new debt will refinance existing debt.

Fitch also downgraded from AA to AA- some $4.1 billion of the district's outstanding general obligation bonds.

If there's a silver lining, these AA- ratings are still investment grade -- meaning bond investors don't need to worry much about the district defaulting on its debt.

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